Morgan Stanley calls Valeant 'house of cards' in Allergan pitch

Soyoung Kim, Olivia Oran

6 Min Read

The head offices of Valeant Pharmaceuticals International Inc. are seen in Laval, Quebec May 20, 2014. REUTERS/Christinne Muschi

NEW YORK (Reuters) - Morgan Stanley (MS.N), an adviser to Valeant Pharmaceuticals International Inc (VRX.TO) in its $53 billion hostile bid for Allergan Inc (AGN.N), initially tried to get hired by Allergan and in its pitch called the unsolicited bidder a “house of cards,” according to Allergan.

The Botox maker released email exchanges with Morgan Stanley bankers on Monday, which reveal the bankers were pitching for a defense assignment from Allergan, offering advice as to how the company could successfully defend the unwanted suitor.

"Executives from Morgan Stanley, the investment bank understood to have recently been retained by Valeant, have sent emails directly to Allergan’s management team that suggest they share the concerns of Allergan...," the company said in a statement. (Allergan statement: r.reuters.com/jep22w)

Allergan said that in a May 13 email to Chief Executive Officer David Pyott and Chief Financial Officer Jeff Edwards, Morgan Stanley’s global head of M&A Robert Kindler said the company could be more aggressive in going after Valeant’s business model and the value of its stock.

David Horn, a managing director at Morgan Stanley’s healthcare group, followed up with an email to Edwards on May 18.

“Part of what Rob (Kindler) is suggesting (to Allergan) is to allow him to use his significant relationships with media and analysts to provide a clear and detailed articulation of why Valeant is a house of cards and your investors should not want to take their stock,” Horn said in one of the email exchanges shown by Allergan.

Representatives of Morgan Stanley and Allergan declined to comment.

“Kindler is one of the best M&A bankers out there. While we will have some fun with him later, he’s still very much on our team,” Valeant CEO Mike Pearson said in a statement. “It’s clear that Allergan’s release is a sign of desperation, and we look forward to proving the naysayers wrong.”

In addition to the email exchanges with Morgan Stanley, the drugmaker in its statement also released third-party views from analysts, investors and media that question Valeant’s business model.

Morgan Stanley, like other investment banks, pitched for business from both Allergan and Valeant as the bidding war escalated. Banks have different teams that work with different clients, which sometimes have divergent interests.

In its Allergan pitch, Morgan Stanley argued that Allergan’s financial adviser, Goldman Sachs Group Inc (GS.N), is not outspoken enough in attacking Valeant’s stock value because the bank is historically close to the Canadian drugmaker and has done a lot of business with the company, people familiar with the matter said.

Goldman advised Valeant in its Bausch & Lomb purchase last year and provided committed financing for the transaction. Valeant’s chief financial officer, Howard Schiller, was a long-time Goldman executive.

Allergan chose not to add Morgan Stanley to its team of financial advisers, partly because the bank has a potential conflict having an overweight rating on Valeant’s stock, people familiar with the matter said.

Valeant and its ally Pershing Square Capital Management - Allergan’s biggest shareholder - have offered to buy Allergan for $53 billion in cash and shares. Allergan has rejected the offer and refused to negotiate, leading Pershing to move toward replacing most of Allergan’s board at a special meeting.

However, Valeant’s Toronto-listed stock has fallen in recent weeks, with Allergan stepping up its attack on the rival’s business model. Shares of Valeant have fallen nearly 7 percent in the last five days, while the S&P 500 has remained flat.

Allergan has argued that Valeant shuns research and development and relies solely on acquisitions to drive growth, a model which it calls unsustainable. Allergan has compared Valeant to Tyco, the scandal-plagued company which built itself up through acquisitions and then collapsed.

Valeant has defended itself, with Ackman arguing that the company’s business model is more similar to Warren Buffett’s Berkshire Hathaway Inc (BRKa.N) than to Tyco.

Valeant, which has been working with Barclays Plc (BARC.L) and RBC Capital Markets (RY.TO) for the past few months, has recently added Morgan Stanley as a financial adviser, people familiar with the matter said.

Valeant decided to bring in Morgan Stanley for its expertise in advising on hostile deals. While the company initially believed Allergan would eventually come to the negotiating table, the target’s repeated rejections made it clear the effort was headed for all-out hostile bidding.

Companies often choose to hire additional advisers in protracted, complicated takeover battles. When Sanofi SA (SASY.PA) made a hostile bid for Genzyme in 2010, which succeeded eventually, Morgan Stanley was brought on several weeks into the process.